Virus shakes up Buffett's business model

By Katherine ChiglinskyEven as market watchers await Warren Buffett’s splashy move to seize on fallout from the current crisis, his Berkshire Hathaway Inc. hasn’t been spared by the pandemic.Coronavirus-related shutdowns across the U.S. have hit Berkshire units from See’s Candies and a shoemaker to industrial behemoth Precision Castparts. That could leave a few scars on the conglomerate that gives the billionaire investor his ammo and has been pumping out more than $20 billion in annual profit in recent years.Buffett’s business partner, Charlie Munger, put it bluntly. “We’ve got a few businesses, small ones, we won’t reopen when this is over,” he told the Wall Street Journal, without naming the units.As Berkshire’s chairman and chief executive officer, Buffett has spent more than five decades crafting a behemoth with businesses in industries including insurance, energy and retail. That diversity helped the company weather the credit crisis in 2008, allowing its iconic leader to invest vast sums into other struggling companies.Buffett has stayed relatively quiet amid the turmoil this time around as the pandemic underscores just how tied his businesses are to the U.S. economy, which is getting hit on all sides by the virus and its ripple effects.“There’s no fortress that’s immune to that right now,” said Lawrence Cunningham, a professor at George Washington University Law School and co-author of the book “Margin of Trust: The Berkshire Business Model.”Some Berkshire operations are already feeling the pain. See’s, which makes the treats that Buffett and Munger famously munch on during their annual shareholder meetings, announced a furlough of its retail workers in early April, and is now testing whether it can reopen some shops. Shoe seller Justin Brands shut outlets throughout Missouri. Berkshire’s BNSF is expected to report that rail traffic declined during the first quarter, according to data from the Association of American Railroads and Bloomberg Intelligence.Industrial operations took a hit, too. Precision Castparts, acquired in 2016, manufactures components for the aerospace and power generation industries. The company said earlier in April that it would temporarily halt operations at a plant in Portland, Oregon, as customers reduced orders.To be sure, Buffett’s promise that Berkshire will “forever remain a financial fortress” hasn’t been broken yet. The company reported a $128 billion cash pile at the end of last year, as well as a stock portfolio valued at more than $248 billion.Some of its biggest revenue generators remain on solid footing. Auto insurer Geico said that shelter-in-place policies across the U.S. have reduced miles driven, which can translate into fewer accidents. And sprawling operations including the energy companies and heavy manufacturers are on the job.At chemical maker Lubrizol, the pandemic has forced a pivot familiar to countless businesses. CEO Eric Schnur said social distancing and work-from-home measures are now common at a company that began dealing with the effects of coronavirus months ago at operations in Asia, and is accustomed to rigid safety standards because of the dangerous chemicals that are part of its work.“It’s nowhere near business as usual, of course,” he said in an interview. “But keeping people safe in a potentially unsafe situation is something we think about every day whether or not there’s a coronavirus pandemic.”Schnur said he and other Berkshire unit chiefs benefit from a decentralized model allowing managers to operate with a degree of autonomy in good times and bad. That type of model allows executives with the deepest knowledge of a business to be the ones who implement strategies, according to Cunningham. Still, Schnur said he’s able to tap the expertise of Greg Abel, the vice chairman for non-insurance operations, if needed.Lubrizol, which hasn’t cut workers in the crisis, is ramping up production of an ingredient used in making hand sanitizers and prioritizing products needed for the manufacture of medical devices. The company announced Monday that it was donating materials necessary to create personal protective equipment, aiding Nike Inc.’s efforts to donate gear for health-care workers.Read more about the production of hand sanitizerApart from Berkshire’s day-to-day operations, investors are left wondering what Buffett’s been up to. During the recent bull market, Berkshire underperformed the S&P 500 Index as Buffett struggled to find large companies to buy. Now, valuations have plummeted, creating an opening not seen in more than a decade.Munger said that he and Buffett are being careful. Companies aren’t begging Berkshire for capital because most people are frozen as they try to figure out how to navigate this “typhoon,” Munger told the Wall Street Journal.Berkshire’s earnings, set to be released in May, will shed some light on Buffett’s moves. Even in a quarter quiet on the front for major acquisitions, the results could indicate whether Buffett and his investment managers, Todd Combs and Ted Weschler, had an appetite for shares in public companies during the market downturn.Part of Buffett’s success during the financial crisis came from the lucrative preferred-stock and warrant deals he made with companies including Goldman Sachs Group Inc. While Buffett has yet to announce a similar deal recently, shareholder Thomas Russo said Buffett’s ability to evaluate unique opportunities may help again.“He’s patient,” said Russo, who oversees about $10 billion including Berkshire shares at Gardner Russo & Gardner. “One of the best features is that he is able to see opportunities broadly.”Buffett, 89, is set to host a virtual version of Berkshire’s annual meeting in May, an event that normally draws thousands of visitors to his hometown of Omaha, Nebraska. Investors hope he’ll have the “washtub” that he described in his 2017 annual letter:“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold,” Buffett wrote. “When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

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